NN(NNBR) - 2019 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements NN, Inc. reported a 26% increase in net sales to $213.3 million for Q1 2019, driven by acquisitions, yet net loss widened to $18.6 million, and total assets expanded to $1.58 billion with negative operating cash flow Condensed Consolidated Statements of Operations | Metric | Three Months Ended March 31, 2019 (in thousands) | Three Months Ended March 31, 2018 (in thousands) | | :--- | :--- | :--- | | Net sales | $213,256 | $169,148 | | Income from operations | $601 | $3,693 | | Net loss | $(18,600) | $(5,983) | | Net loss per share (Basic & Diluted) | $(0.44) | $(0.22) | Condensed Consolidated Balance Sheet Summary | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--- | :--- | :--- | | Total current assets | $314,450 | $296,871 | | Total assets | $1,580,993 | $1,501,570 | | Total current liabilities | $165,112 | $145,030 | | Total liabilities | $1,186,084 | $1,083,275 | | Total stockholders' equity | $394,909 | $418,295 | Condensed Consolidated Statements of Cash Flows | Metric | Three Months Ended March 31, 2019 (in thousands) | Three Months Ended March 31, 2018 (in thousands) | | :--- | :--- | :--- | | Net cash used by operating activities | $(2,712) | $(974) | | Net cash used by investing activities | $(3,679) | $(32,818) | | Net cash provided by (used by) financing activities | $8,876 | $(6,261) | | Net change in cash and cash equivalents | $2,281 | $(39,491) | Note 1. Interim Financial Statements NN, Inc. is a global diversified industrial company manufacturing high-precision components, and its Q1 2019 interim financial statements reflect the adoption of the new ASC 842 lease accounting standard - NN, Inc. is a global diversified industrial company with 51 facilities, manufacturing high-precision components for medical, aerospace, defense, electrical, automotive, and general industrial markets[25] - On January 1, 2019, the company adopted the new lease accounting standard, ASC 842, using the modified retrospective transition approach, resulting in recording lease-related assets and liabilities on the balance sheet for leases with terms greater than twelve months[29] Note 2. Acquisitions This note details 2018 acquisitions, notably Paragon Medical, which significantly expanded the Life Sciences portfolio and impacted financial comparability - On May 7, 2018, the company acquired Paragon Medical, a medical device manufacturer, to expand its Life Sciences portfolio[35] - Unaudited pro forma net sales for the three months ended March 31, 2018, including the Paragon Medical acquisition, would have been $209.8 million, with a pro forma net loss of $8.1 million[37][39] - Other 2018 acquisitions included Bridgemedica, LLC (medical device solutions) and Southern California Technical Arts, Inc. (aerospace and defense components)[40][41] Note 3. Segment Information The company operates through Mobile Solutions, Power Solutions, and Life Sciences segments, with Life Sciences becoming the largest by revenue in Q1 2019 due to acquisitions Segment Results for Three Months Ended March 31, 2019 vs 2018 (in thousands) | Segment | Net Sales 2019 (in thousands) | Net Sales 2018 (in thousands) | Income from Operations 2019 (in thousands) | Income from Operations 2018 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Mobile Solutions | $78,075 | $89,794 | $4,107 | $9,785 | | Power Solutions | $49,657 | $48,682 | $3,824 | $5,233 | | Life Sciences | $86,008 | $31,200 | $3,846 | $4,204 | Total Assets by Segment (in thousands) | Segment | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--- | :--- | :--- | | Mobile Solutions | $392,100 | $356,387 | | Power Solutions | $311,771 | $297,947 | | Life Sciences | $824,891 | $802,770 | Note 5. Goodwill Goodwill totaled $440.2 million as of March 31, 2019, with market capitalization below book value indicating potential future impairment, especially for the Power Solutions segment - Total goodwill was $440.2 million as of March 31, 2019, with the majority allocated to Life Sciences ($345.5 million) and Power Solutions ($94.7 million)[54] - The company's market capitalization was below its net book value as of March 31, 2019, a potential indicator of goodwill impairment[54] - The Power Solutions segment, which had a significant goodwill impairment in 2018, is at risk of further material impairment charges if its performance does not meet expectations[55] Note 9. Debt Total principal debt outstanding reached $873.4 million as of March 31, 2019, and the company entered a $700 million interest rate swap to manage variable-rate debt risk Debt Balances (in thousands) | Debt Instrument | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--- | :--- | :--- | | Senior Secured Term Loan | $530,625 | $532,063 | | Incremental Term Loan | $276,000 | $279,000 | | Senior Secured Revolver | $56,184 | $38,720 | | Total principal | $873,410 | $859,593 | - In February 2019, the company entered into a $700.0 million notional amount fixed-rate interest rate swap to manage interest rate risk on its variable-rate debt until 2022[73] - The company was in compliance with all debt covenants as of March 31, 2019[71] Note 10. Leases Adoption of ASC 842 on January 1, 2019, led to the recognition of $81.3 million in right-of-use assets and $83.2 million in total lease liabilities on the balance sheet - Adopted ASC 842 on January 1, 2019, resulting in the recognition of right-of-use assets and lease liabilities on the balance sheet[74] Lease Assets and Liabilities as of March 31, 2019 (in thousands) | Category | Financial Statement Line Item | Amount (in thousands) | | :--- | :--- | :--- | | Assets | | | | Operating lease assets | Operating lease right-of-use assets | $68,458 | | Finance lease asset | Finance lease right-of-use assets | $12,886 | | Total lease assets | | $81,344 | | Liabilities | | | | Operating lease liabilities | Current & Non-current | $74,605 | | Finance lease liabilities | Current & Non-current | $8,551 | | Total lease liabilities | | $83,156 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes Q1 2019's 26% revenue growth primarily to 2018 acquisitions, offset by organic volume decline in automotive, and believes current liquidity is sufficient for the next year Key Changes in Results of Operations (Q1 2019 vs Q1 2018, in thousands) | Item | 2019 (in thousands) | 2018 (in thousands) | $ Change (in thousands) | | :--- | :--- | :--- | :--- | | Net sales | $213,256 | $169,148 | $44,108 | | Cost of sales | $161,269 | $126,444 | $34,825 | | Selling, general and administrative expense | $28,125 | $22,177 | $5,948 | | Depreciation and amortization | $23,425 | $14,281 | $9,144 | | Income from operations | $601 | $3,693 | $(3,092) | - Net sales increase of $44.1 million was primarily due to $55.2 million from 2018 acquisitions, offset by an $8.0 million decrease in volume (mainly automotive) and $2.8 million in unfavorable foreign exchange effects[138] - The company's market capitalization declined below book value as of March 31, 2019, but management concluded it was not an indication of additional goodwill impairment due to a subsequent increase in market cap and factoring in a control premium[164] Results by Segment Mobile Solutions sales declined due to automotive market weakness, Power Solutions saw a slight increase from acquisition, and Life Sciences sales surged significantly from acquisitions - Mobile Solutions: Net sales decreased by $11.7 million to $78.1 million, and income from operations fell by $5.7 million, primarily due to reduced automotive demand in North America and China[151][152] - Power Solutions: Net sales increased by $1.0 million to $49.7 million, driven by the Technical Arts acquisition ($1.6 million); income from operations decreased by $1.4 million due to higher SG&A expenses[153][154] - Life Sciences: Net sales grew by $54.8 million to $86.0 million, with $53.6 million attributable to the Paragon Medical and Bridgemedica acquisitions; income from operations decreased slightly by $0.4 million due to integration costs and investments for future growth[155][156] Liquidity and Capital Resources As of March 31, 2019, the company had $20.3 million in cash and $56.7 million in unused borrowing capacity, deemed sufficient for future operations and debt service - As of March 31, 2019, liquidity consisted of $20.3 million in cash and $56.7 million of unused borrowing capacity under the Senior Secured Revolver[165] - Total outstanding principal under the credit facility was $862.8 million as of March 31, 2019[171] - A $700 million fixed-rate interest rate swap was executed in February 2019 to change a portion of variable-rate debt to a fixed rate of 2.4575% (plus margin), reducing exposure to interest rate fluctuations[170] Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate risk from variable-rate debt, with a 1% rate increase raising annual interest expense by $8.7 million, partially mitigated by a $700 million interest rate swap - A one-percent increase in interest rates on the company's variable rate debt would increase annual interest expense by approximately $8.7 million ($5.3 million from Term Loan, $2.8 million from Incremental Loan, $0.6 million from Revolver)[183][184][185] - To manage interest rate risk, the company entered into a $700 million fixed-rate interest rate swap in February 2019, converting a portion of its variable-rate debt to a fixed rate[186] - The company is exposed to foreign currency risk through its international operations and various intercompany transactions but did not hold any foreign currency derivatives as of March 31, 2019[187] Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of March 31, 2019, due to a material weakness in financial reporting personnel, with remediation efforts ongoing - The CEO and CFO concluded that disclosure controls and procedures were not effective as of March 31, 2019[189] - The ineffectiveness is due to a material weakness in internal control over financial reporting related to a lack of sufficient, adequately trained personnel in the finance function[191] - Remediation efforts are in progress, primarily through the hiring of qualified finance personnel in 2018[193] PART II. OTHER INFORMATION Legal Proceedings The company is involved in a Brazilian tax matter with a possible loss range of $0 to $6.0 million, for which it is entitled to indemnification from former Autocam shareholders - The company is defending a tax matter in Brazil regarding ICMS tax credits claimed by its subsidiary, Autocam Brazil, prior to its acquisition[197] - While a loss is not considered probable, the estimated range of possible losses is from $0 to $6.0 million; no amount was accrued for this matter as of March 31, 2019[198] - The company is entitled to indemnification from the former shareholders of Autocam for potential losses related to this tax matter[199] Risk Factors No material changes have occurred to the risk factors previously disclosed in the company's 2018 Annual Report on Form 10-K - No material changes to the risk factors disclosed in the 2018 Annual Report on Form 10-K have occurred[201] Unregistered Sales of Equity Securities and Use of Proceeds In March 2019, the company withheld 18,311 shares at an average price of $7.71 per share to satisfy tax obligations for employees upon restricted stock vesting - During the quarter, 18,311 shares were withheld at an average price of $7.71 to pay for tax obligations due upon the vesting of restricted stock for certain employees[202] Defaults upon Senior Securities The company reported no defaults upon senior securities - The company reported no defaults upon senior securities[202] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[203] Other Information The company reported no other information under this item - The company reported no other information under this item[204] Exhibits This section lists exhibits filed with the Form 10-Q, including separation agreements, officer certifications, and XBRL interactive data files - Exhibits filed include separation agreements, CEO and CFO certifications, and XBRL data files[205] Signatures